PM End of Week Market Commentary - 8/3/2018

davefairtex
By davefairtex on Sun, Aug 5, 2018 - 8:21am

On Friday, gold rose +6.00 [+0.49%] to 1221.90 on very heavy volume, while silver climbed +0.10 [+0.65%] to 15.47 on moderate volume. The buck was mostly unchanged, inching down -0.03%.  The rally in PM today seemed to have more to do with a strong move higher in copper, although moves in currency might have also acted as a catalyst. 

The big news of the week: Trump asked his trade rep to consider imposing 25% tariffs on $200 billion in Chinese imports. Boom: metals promptly sold off hard.  There was also an FOMC meeting (a non-event), a BOJ meeting (printing will continue), and an ECB meeting (no rate increases for at least another year), and a Nonfarm Payrolls report that looked a bit hot in terms of wage growth – which lined up with a Personal Income report that also suggested both incomes and spending were rising a bit faster than expected.

The metals sector map suffered from tariff-ism this week, with copper and palladium leading the group lower. Silver led gold down, while the miners led the metal, and the juniors led seniors. All that is bearish. Platinum did manage to bounce on Friday, popping back above its 9 MA, as did gold/Euros. Gold across the pond is actually … if not looking good, it seems as though it might be putting in a low. The rest of the metals remain in downtrends.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Platinum $PLAT 0.04% -13.90% falling falling falling falling ema9 on 2018-08-03 2018-08-03
Gold $GOLD -0.02% -4.12% falling falling falling falling ema9 on 2018-08-01 2018-08-03
Gold/Euro $GOLD:$XEU -0.03% -1.68% rising falling falling falling ema9 on 2018-08-03 2018-08-03
Silver $SILVER -0.58% -7.33% rising falling falling falling ema9 on 2018-08-01 2018-08-03
Senior Miners GDX -0.75% -6.78% falling falling falling falling ema9 on 2018-07-26 2018-08-03
Silver Miners SIL -1.09% -19.72% falling falling falling falling ema9 on 2018-07-26 2018-08-03
Junior Miners GDXJ -1.44% -4.95% falling falling falling falling ema9 on 2018-07-26 2018-08-03
Copper $COPPER -1.52% -4.33% rising falling falling falling ema9 on 2018-08-01 2018-08-03
Palladium $PALL -1.63% 2.57% falling falling falling falling ema9 on 2018-08-01 2018-08-03

Gold fell -4.78 [-0.39%] this week, making a new low on Friday to 1212.50. The bullish harami on Friday was mildly bullish (38% bullish reversal), but gold remains below its 9 MA, and the forecaster remains in a downtrend in all 3 timeframes. The only spot of good news: gold/Euros issued a forecaster buy signal on Friday.

The September rate-increase chances rose to 90%.

COMEX GC open interest fell –2,341 contracts this week.

The COT commercial net position rose +18k this week, which was 35k fewer shorts, but also 17k fewer longs. That's a huge reduction in commercial shorts, bringing the commercial short position back to where it was in January 2016. That's quite bullish. Although the narrative is that nobody cares, the commercials are covering short positions hand over fist at these price levels. Managed money net fell by -6k, which was 6k new shorts, and 331 new longs. The managed money net position continues to be the lowest on record, and the managed money short position is setting new records every week.

Silver fell -0.08 [-0.51%] on the week, moving lower but avoiding a new low by a few cents. Friday's bullish engulfing candle was positive (45% bullish reversal), but silver forecaster ended the week in a downtrend – in all 3 timeframes. Silver ended the week slightly more bullish than gold.

The gold/silver ratio rose +0.10 to 78.99. That's slightly bearish.

COMEX SI open interest rose 11,771 contracts. That's a large increase in OI.

The COT commercial net position fell by -4k, a minor move lower, which involved 5.6k new shorts and 1.4k new longs. Managed money net rose by +4.7k, which was 3.7k new longs and 1k fewer shorts. Now its managed money doing the covering in silver. Managed money remains at a near-record short position in silver, and the commercial net position is reasonably suggestive of a low.

Miners fell -0.91% on the week, making a new low before rebounding on Friday. Candle print on Friday was a weak-looking swing low; miners remain below the 9 MA, and the bounce was not quite enough to signal a forecaster buy signal. XAU remains in a downtrend in all 3 timeframes.

GDX:$GOLD fell -0.36%, while the GDXJ:GDX ratio dropped -0.70%. That's somewhat bearish.

USD

The buck rose +0.47 [+0.50%] to 94.75. The buck is once more testing the 95 resistance; a convincing close above 95 would probably lead to a brisk sell-off in the metals space. The buck ended the week in an uptrend in all 3 timeframes. It seems as though, more likely than not, we break higher. This week saw the highest weekly close for the buck dating back to mid-2017.  On the week, the Euro fell -0.36%, while CNY dropped -0.43%. CNY is down about 8.6% over the past 8 months.

The backdrop: ECB won't raise rates for another 12 months at least.  FOMC is set to raise rates at least twice more.  China is actively devaluing its currency.  The US economy is strong at the moment (lots of borrowed money), and this is all dollar-positive. 

US Equities/SPX

SPX rose +21.53 [+0.76%] to 2840.35. SPX managed to retrace its losses on Friday and Monday, moving back up to near its highs from last week. SPX was not particularly affected by the tariff news, or really anything else for that matter. AAPL became a trillion-dollar company, Musk promised profits for TSLA by next quarter; fun was had by all, more or less.

Weekly sector map has REITs leading, with energy doing worst. Its hard to draw conclusions from this one, since financials and tech are languishing a bit.  It looks as though crude and energy-related issues have come under a bit of pressure at this point.  While the map is green, this isn't a bullish configuration.

VIX fell -1.39 to 11.64. Below 12 has been a pretty good buy for the VIX in 2018.

Name Chart Chg (W) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
REIT RWR 3.47% 2.50% rising rising rising rising ema9 on 2018-07-31 2018-08-03
Healthcare XLV 2.10% 12.74% rising rising rising rising ema9 on 2018-07-24 2018-08-03
Cons Staples XLP 1.70% -1.60% rising rising falling rising ma200 on 2018-08-02 2018-08-03
Telecom XTL 1.46% 1.28% rising rising rising rising ema9 on 2018-08-02 2018-08-03
Utilities XLU 1.25% -1.33% rising rising falling rising ema9 on 2018-07-31 2018-08-03
Technology XLK 1.21% 26.51% falling rising rising falling ema9 on 2018-08-02 2018-08-03
Homebuilders XHB 0.82% 2.44% falling falling falling rising ema9 on 2018-08-03 2018-08-03
Cons Discretionary XLY 0.20% 22.90% falling rising rising rising ema9 on 2018-08-03 2018-08-03
Defense ITA 0.09% 21.43% rising rising rising falling ema9 on 2018-07-31 2018-08-03
Materials XLB -0.02% 9.15% rising falling rising falling ema9 on 2018-08-03 2018-08-03
Financials XLF -0.04% 11.50% rising falling rising falling ema9 on 2018-08-03 2018-08-03
Industrials XLI -0.21% 10.33% rising rising rising falling ma200 on 2018-07-25 2018-08-03
Gold Miners GDX -0.75% -6.78% falling falling falling falling ema9 on 2018-07-26 2018-08-03
Energy XLE -1.81% 14.99% rising falling rising falling ma50 on 2018-08-02 2018-08-03

Gold in Other Currencies

Gold moved higher in most currencies, falling slightly in USD and INR.

Rates & Commodities

TLT fell -0.20% on the week, but ending the week on a positive note; swing low on Thursday, and a nice brisk (+0.50%) rally on Friday. TY actually rallied +0.08%, on the week, with a swing low and a forecaster buy signal on Friday. TY is now back above its 9 MA, and is in an uptrend in both the daily and monthly timeframes, but it remains in a downtrend on the weekly.  Its hard to know where the 10-year goes next. After hitting 3% on Wednesday, the 10-year yield ended the week down -0.7 bp to 2.95%.

JNK rose +0.08% on the week; it was all over the map, first making a new high – almost breaking above a previous high, which would have been quite significant - then being smashed on Wednesday, and back up again by Friday. Forecaster remains in an uptrend, so there you go. Still no signs of trouble yet from the junk bond market.

Crude fell -0.66 [-0.96%] to 68.20, correcting on Tuesday and Wednesday due to some bearish-looking inventory reports. Both API and EIA showed builds; EIA was slightly better than the API (crude: +3.8m, gasoline: -2.5m, distillates: +3.0m). Oil's bounce on Thursday was probably because of the news that Iran was planning on staging “military exercises” near the strait of Hormuz, through which 20% the world's oil production passes every day. It looked to me as though that caused a flurry of short-covering on Thursday which was good for a $2 bounce. On the supply side, OPEC boosted production by 340 kbpd in July. Interestingly, US production unexpectedly dropped 30 kbpd in May. If this happens again next month, we should all start paying much closer attention. Either oil isn't profitable for shale at these levels, or there are limits to oil transport in the shale regions, or we are running out of sweet spots to drill at these prices. Any way you slice it, peaking US production would be a very big deal. It would also suggest that $68 oil almost certainly wouldn't last very much longer.

Oil is in an uptrend in both weekly and monthly timeframes, with a buy signal this week which hints that the recent correction might be over. 

Physical Supply Indicators

* The GLD ETF tonnage on hand fell -5.31 tons, with 795 tons in inventory.

* ETF Discount to NAV:

 PHYS 9.80 -1.16% to NAV [increase]
 PSLV 5.62 -3.00% to NAV [increase]
 CEF 12.11 -3.69% to NAV [increase]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows a 1% discount for gold and no premium for silver.

* Big bars premiums were: gold [1kg] 0.72% and silver [1000oz] 3.14%.

Grey Swans & Geopolitics

  • German Government/Migration: Bavaria opened 7 new “anchor centers” (please, don't call them “camps”) for processing asylum applications, where migrants will stay – involuntarily, it would seem - for up to 18 months while their applications are processed. In addition, there is a new cap of 1,000 refugee-relatives that are allowed to be brought to Germany per month. Both items represent a victory for Seehofer in his campaign to restrict migration to Germany. https://global.handelsblatt.com/politics/germany-asylum-bavaria-anchor-centers-950851

  • Italy – Migration: no news.

  • China – Tariffs: As mentioned, Trump asked the US trade rep to explore placing 25% tariffs on up to $200 billion in Chinese imports. This, after the CNY has declined by more than 6% since June 2018, which has provided US consumers a discount on all Chinese products.

  • China – Debt: No news.

  • Yield Curve Inversion: the 1-10 spread widened 0.3 bp to 53.9 bp.

  • US Congressional Elections, 2018. The generic ballot shows Democrats 47.7% [+7.8%] vs Republicans 39.9%. Democrat win → impeachment attempt? https://projects.fivethirtyeight.com/congress-generic-ballot-polls/

  • North Korea: Pompeo said he was optimistic that de-nuking North Korea could be achieved, while a report commissioned by the UN Security Council released this week states that North Korea has not stopped its nuclear and missile programs.

  • Mueller Investigation: Paul Manafort's trial has started. He is mainly being charged with tax evasion – he allegedly didn't report the...considerable income he made from advising various Ukrainian leaders. One wonders what we'd find if the FBI decided to investigate former central bankers, generals, heads of the SEC and FDA, etc.  Still no “collusion” with Russia.

Summary

The metals bounce last week ran out of steam just in time for Trump to increase pressure on China by threatening to impose 25% tariffs on up to $200 billion in Chinese products. This dragged metals prices right back down, and even drove gold to a new low. A flurry of meetings by the various central banks (Fed, BOJ, ECB) ended up with no changes in policy.

Big bar gold premiums are moving slowly towards 0%, while ETF discounts increased. If big-bar gold starts to move into premium, that could definitely be suggesting shortages of gold at these prices.  No shortages of silver, however.

The gold COT report shows another record managed money net position, while commercials covered a huge number of gold shorts this week, ringing the cash register down here at 1210.  Gold looks set to explode higher, at least from the COT perspective.  The commercials have cashed in 109 tons of paper gold this week alone - they closed out 15% of their total outstanding position. Silver's COT doesn't look quite as good, but the overall positions could well represent a low price for silver – especially the record number of managed money silver shorts.

With every passing week, a low looks more and more likely. Managed money is heavily offside short gold, and the commercials have cut their short positions in half from the 1370 top. All the move needs is a trigger. I'm not sure what that trigger will be, but the move I'm projecting will be a very sharp, strong move higher once it happens. There may well be little time to get on board. Train leaving station, etc. At least, that's the setup the COT is showing.

I know, it sounds like I've become a goldbug. But it really could happen this way. Did you see what happened on Thursday to crude when there was even a hint of military activity in the Straits of Hormuz? The crude oil shorts fled in a big hurry – it was a $2 move in about 2 hours. Same thing could happen to the metals once either the tariff issue is fixed, and/or there is some other catalyst that appears.

The are two problems with this lovely picture.  Problem #1 is the buck, which appears ready to break out above 95.  If it does this, I do not think the commercials will trigger any sort of rally in the metals.  If the dollar move is strong enough, gold will be hard pressed to remain above 1200.  Problem #2 is tariffs; if Trump actually implements a 25% tariff on $200 billion in Chinese products...we probably also lose 1200.

Weekly trends (in order of strength):

Uptrend: SPX, DJIA, bitcoin, USD, crude.

Downtrend: miners, gold, silver, 10-year treasury, NDX, BAA corporates, copper.

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